Yesterday, West Texas Intermediate touched $95 per barrel for the first time in years, and Brent briefly traded above $96 per barrel. Expectations about Brent hitting $100 per barrel are now more about ‘when” rather than “if”. Even OPEC is worried about it. Unfortunately, it seems there is little it can do as a group to prevent this from happening. “For me, being professional, I can see it happening, but I don’t want it to happen,” said Egypt’s Tarek el Molla about oil reaching $100 per barrel. “It is on the way, definitely,” he told CNBC’s Hadley Gamble this week.
El Molla was speaking at an industry event in Egypt where his counterparts from Cyprus and Israel shared the sentiment, with Cyprus’ energy minister saying the prospect of oil at $100 was a “very scary” one.
Meanwhile, OPEC’s head, Mohamed Barkindo, said the cartel was making an effort to ensure supply. “There’s no doubt that we are concerned with ensuring that the security of supply is also guaranteed,” he said during the same event, EGYPS 2022. OPEC and its partners were working to “ensure that we continue to be reliable and dependable to supply oil to global markets.”
Perhaps meant to appease traders, this last statement is more likely to worry them. Even though the main driver behind the latest spike in oil prices is geopolitical rather than fundamental, with all eyes on Ukraine, tensions will sooner or later dissipate, and fundamentals will re-establish themselves. And if the latest from the International Energy Agency’s chief, Fatih Birol, is any indication, oil’s fundamentals continue to be unfavorable for fans of affordable oil.
After urging the world to stop exploring for more oil in the IEA’s Roadmap to Net Zero published in May last year, Birol once again did a 180 and urged OPEC to pump more. The first time he, or rather, the IEA, did that was last October when it said in its Oil Market Report that OPEC’s spare production capacity was dangerously low and it needed to boost investments in new production.
“As the bloc ramps up production, its spare capacity will dwindle. Compared with a cushion of 9 mb/d in 1Q21, effective spare capacity could fall below 4 mb/d by 2Q22 and be concentrated in only a few Middle Eastern countries, although supply is expected to exceed demand. Shrinking global spare capacity underscores the need for increased investments to meet demand further down the road,” the IEA said.
Yet many OPEC members cannot afford to invest what’s necessary in new exploration, not least because of documents such as the IEA’s very own Road Map to Net Zero, which predict the imminent demise of oil and gas. Banks are pulling out of the oil and gas industry, so financing is about to become trickier to obtain, and Big Oil is trying to become green even though it saw a windfall from the improvement in oil prices that perhaps even its most ESG-minded investors would appreciate.
Under other circumstances, some OPEC members, especially the poorer ones, would have perhaps appreciated Brent crude trading at over $100 per barrel. However, the circumstances right now are quite challenging. The world’s top economies are fighting runaway inflation while trying to juggle their new climate change agenda and keeping energy relatively affordable for most of their citizens—this last part is becoming the main challenge.
Normally, excessively high prices lead to a slump in demand and this is cause for concern enough for oil-dependent economies. But in the current context of a deliberate push away from fossil fuels, excessive prices for oil could provide a much-needed additional motivation to double down on the energy transition, both on the part of governments and businesses.
By Irina Slav for Oilprice.com
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